LESSON 7 WHAT ARE STOCK MARKETS? LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 107 LESSON 7 WHAT ARE STOCK MARKETS? LESSON DESCRIPTION Primary market The lesson introduces conditions necessary Secondary market for market economies to operate. Against this background, students learn concepts Stock market and background knowledge—including pri- mary and secondary markets, the role of in- OBJECTIVES vestment banks, and initial public offerings Students will: (IPOs)—needed to understand the stock • Identify conditions needed for a market market. The students also learn about dif- economy to operate. ferent characteristics of major stock mar- kets in the United States and overseas. In • Describe the stock market as a special a closure activity, students match stocks case of markets more generally. with the market in which each is most • Differentiate three major world stock likely to be traded. markets and predict which market might list certain stocks. INTRODUCTION For many people, the word market may CONTENT STANDARDS be closely associated with an image of a Voluntary National Content Standards place—perhaps a local farmer’s market. For in Economics, 2nd Edition economists, however, market need not refer to a physical place. Instead, a market may • Standard 5: Voluntary exchange oc- be any organization that allows buyers and curs only when all participating parties sellers to communicate about and arrange expect to gain. This is true for trade for the exchange of goods, resources, or ser- among individuals or organizations vices. Stock markets provide a mechanism within a nation, and among individuals whereby people who want to own shares of or organizations in different nations. stock can buy them from people who want • Standard 7: A market exists when to sell shares of stock. buyers and sellers interact. This in- The three largest stock markets in the teraction determines market prices world are the New York Stock Exchange and thereby allocates scarce goods and (NYSE), the NASDAQ Stock Market, and services. the Tokyo Stock Exchange. Although these • Standard 10: Institutions evolve and markets differ from one another, especially are created to help individuals and in the kinds of stock traded and the mecha- groups accomplish their goals. Banks, nisms used for trading, all three are known labor unions, markets, corporations, as secondary markets. They are different legal systems, and not-for-profi t orga- from a primary market in which a company nizations are examples of important sells shares and receives money in an ini- institutions. A different kind of insti- tial public offering (IPO). tution, clearly defi ned and enforced property rights, is essential to a market CONCEPTS economy. Initial public offering (IPO) Market 108 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7 National Standards in K-12 Personal • Private property. Markets de- Finance Education, 3rd Edition pend on an individual’s ability to own and sell property. In market • Financial Responsibility and Deci- transactions, people can choose to sion Making Standard 2: Find and sell property to others and trans- evaluate fi nancial information from a fer the right of ownership with the variety of sources. sale. • Saving and Investing Standard 4: • Competition. Markets foster Describe how to buy and sell invest- competition because they allow the ments. entry of many producers striving to meet the demands of consumers. TIME REQUIRED Competition pressures these pro- 60 minutes ducers to satisfy consumer demand or be forced from the market by MATERIALS others who can. • Slide 7.1 • The profi t motive. Profi ts act • A copy of Activity 7.1 for each student as incentives for individuals and (Internet access required) fi rms. In market transactions, individuals and fi rms that satisfy consumer desires and produce ef- PROCEDURE fi ciently are rewarded with profi ts. 1. Tell the students that this lesson fo- cuses on markets in general and on the • Voluntary exchange. Because stock market in particular. Ask: What consumers have choices in a mar- is a market? What is a stock market? ket, market exchanges are volun- tary. This allows consumers and 2. To begin discussing markets, ask the producers to focus on what they students to list several markets they do best and to trade with others have participated in over the last few who specialize in different areas. weeks. (Examples might include a Markets encourage trade and thus farmers’ market, a supermarket, a retail create wealth. store, a gasoline station.) 4. Introduce the lesson’s focus on stock 3. Ask the students to think about what markets by reference to the previous it would take to establish and maintain discussion. Just as there is a market markets of the sort they have men- for music downloads (iTunes), blue tioned. What sort of legal and economic jeans (department store), or books environment would be necessary? The (bookstore), there is a market for question is somewhat abstract. To help stocks. Somebody who wants to buy the students get at it, you might use stocks can buy them at a stock market. the following prompt: We couldn’t have markets unless we had 5. Explain that stock markets operate ______________. Challenge the students in the same sort of legal and economic to complete the statement. Provide help environment needed by other mar- as necessary. Make a list of the neces- kets. Stock markets are places where sary conditions on the board. The list private property (shares of ownership) should include the following: is bought and sold. Stock markets are competitive markets, with thousands of LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY 109 LESSON 7 WHAT ARE STOCK MARKETS? buyers and sellers striving to make the to brokerage houses, and brokers offer best trades they can. The profi t motive the shares for sale to individuals and prompts traders to obtain and keep institutional buyers on the secondary any gains they can make from stock market through one of the major stock trading. And stock markets depend on exchanges like the New York Stock voluntary exchange. Stock trades are Exchange (NYSE), the NASDAQ Stock not coerced; rather, buyers and sellers Market in the United States, or a stock choose to participate in their efforts to market in another country, such as the invest money wisely. London Stock Exchange or the Tokyo Stock Exchange. 6. As necessary, pause here to establish clearly what a stock is (or review Les- 9. Distribute a copy of Activity 7.1 to son 4). Explain that a stock is a share each student. Have the students read of ownership in a company. If you buy the introduction. Briefl y review the 100 shares of Acme Electronics, you be- overview of market mechanics, using come a part-owner (100 shares’ worth) Slide 7.1 as needed. of Acme Electronics. And why would 10. Have the students read the descrip- people want to buy stock in a given tions of the three major stock markets. company? Identify two main reasons: Call on students to identify the distinc- (a.) they expect to share in a company’s tive characteristics of each of the three profi ts (called dividends) paid out to markets. Record their responses on the shareholders; (b.) they believe the price board. Sample responses: of the company’s stock will rise above the price they paid for it—in other New York NASDAQ Tokyo Stock words, that their asset will grow in Stock Stock Market Exchange value. Exchange (NYSE) 7. Ask the students if they have ever seen Founded in Founded in Founded in a stock store at the mall. If not at the 1792. 1971. 1878. mall, where can you go to buy stocks? Explain that almost all stock sales and About 3,500 About 2,800 About 2,300 companies companies companies purchases—often called stock trades— listed. listed. listed. are handled by a specialized salesper- son called a broker. In addition, almost Home of large Considered the Home of the and well- home of tech Nikkei 226 all stocks are sold by these brokers in established stocks. index. secondary markets. companies. No physical Companies 8. To distinguish between primary and Listed location; separated into secondary markets, Display Slide 7.1. companies trades done three categories: Explain that companies such as Com- must have via computer large, mid- pany X often seek additional resources at least network. sized, and $100,000,000 growth/ Largest market to expand or run their business. One in outstanding startup. in terms of way to generate these resources is to stock and trade stocks traded. 104 members. offer all, or a portion, of the company an average of for sale to the public-at-large (“take a at least 100,000 No fi xed company public”). This is done in the shares per day. number of members. primary market through an initial 1,336 member public offering (IPO) in which stocks seats. are sold to large investment banks. Investment banks then sell the shares 110 LEARNING, EARNING, AND INVESTING FOR A NEW GENERATION © COUNCIL FOR ECONOMIC EDUCATION, NEW YORK, NY WHAT ARE STOCK MARKETS? LESSON 7 11. Have the students complete the Place correct). If a student has a calculator, it the Stock activity. Answers: might be made by Casio or Sony. Both of these fi rms are traded on the Tokyo Market Stocks Stock Exchange. Once the students New York Stock Con Ed DuPont McDon- have made their guesses, ask them to Exchange ald’s use the internet in class to determine (NYSE) which ones are correct and which are NASDAQ Stock Atari Intel Telecom incorrect (or you might assign this as Market Austria homework or a library project).